Page 7 - ISQ UK_October 2021

OCTOBER 2021

The inexorable rise in energy costs, thrown into sharp relief by
the current crisis must, inevitably, result in the steady increase
In truth, the global economy has been in the cost of items perceived by households as essential. So,
deteriorating for a very long time. as the proportionate cost of these items increases, so overall
prosperity is trending downwards. This is important for a
stock market the vast majority of constituent businesses for
In truth, the global economy has been deteriorating for a very
long time. The term “secular stagnation” was coined in the which have models based upon the supply of discretionary
1990s, and with good reason. Whilst it might be tempting to and non-discretionary goods and services. As the pressure
take the view that ultra-easy monetary policy has boosted on prosperity increases so, in addition, will come pressure
global activity over the past dozen years, in reality, the size on businesses models dependent on household income
and complexity of the modern economy is the direct der- streams. Rising costs associated with fractured supply chains
ivation of the use of fossil fuels; oil, gas and coal. From the are adding to building inflationary pressure beneath the sur-
mid-1990s onwards, the cost associated with extracting face and this is putting governments and central banks in a
traditional energy sources has been on a relentlessly rising bind.
trend. Meanwhile, the window of “environmental tolerance” Smug as one might feel, when charging one’s electric vehicle
towards their use has been closing. up at the power point (until the point when the cost of mate-
rials used in the manufacture of batteries becomes exorbitant
This might not have been a problem had a fully “utilisable”
replacement source of energy been available, coupled with a too), the broader point is that the world is reaching the point
willingness on the part of the authorities to adapt and adjust where perpetual fiscal and monetary stimulus reduces
the economy onto a new basis consistent with a radically in its effectiveness and actually becomes dangerous as
altered energy source. But neither has been the case. Wind credit-based lifestyles, even for necessities, become unsus-
and solar power cannot completely replace fossil fuel energy, tainable. Central bankers may initiate the conversation about
for three reasons. tightening monetary policy, but in truth, they are trapped.
The cost of achieving short-term price stability is likely to
Firstly, the creation, expansion and maintenance of the result in more volatility therefore, a well-diversified portfolio
infrastructure associated with renewable energy sources is is vital.
completely dependent upon materials whose supply is driven
by legacy energy from fossil fuels. Secondly, overcoming the
intermittence of wind and solar power requires batteries, a KEY TAKEAWAYS:
dependence which “ups the ante” against seamless trans- • Inflation is likely to remain above target for longer.
mission to an even greater extent. Thirdly, and perhaps most
importantly, even accounting for the use of technological • The global economy faces testing economic chal-
know-how, renewables are unlikely ever to deliver the energy lenges, not all due to COVID-19.
density to which two centuries of reliance on coal, oil and gas
have led us to become accustomed. Sometimes there really • Energy prices will likely remain high.
are no ways around the immutable laws of physics. • Volatility will continue.

In the early days of the industrial revolution, the financial
cost associated with the extraction of fossil fuel was incred-
ibly low. However, as resource has diminished, so the cost
of extraction has steadily increased, slowly at first but much
more rapidly over the past three decades. It is this rapid
recent acceleration, coupled with the recognition that the
“energy cost” associated with renewables will never get
down to the ultra-low levels of the late eighteenth and early
nineteenth centuries, that lies behind secular stagnation. In
short, the heretical assertion is that the world is not, and has
never been, a financial system but rather an energy system.
The current crisis makes this observation all the more telling,
and the air is thick with the sound of chickens coming home
to roost.

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